Wednesday, June 06, 2007

FTC Moves to Block Whole Foods Market's Acquisition of Wild Oats

This posting was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

The Federal Trade Commission (FTC) announced its intention to file a complaint in the federal district court in Washington, D.C. by June 6 to block the proposed combination of the nation's largest “premium natural and organic supermarket chains”—Whole Foods Market and Wild Oats Markets.

According to the agency, the transaction would reduce direct competition and lead to the exercise of unilateral market power, resulting in higher prices and reduced quality, service and choice for consumers. In addition, the FTC contends that entry would not be timely, likely, or sufficient to replace the competition lost in the relevant geographic markets.

In February, Whole Foods and Wild Oats announced a merger agreement under which Whole Foods Market would acquire Wild Oats Markets’ outstanding common stock in a cash tender offer. At that time, Whole Foods had 191 stores in the United States, Canada, and the United Kingdom. Wild Oats Markets currently operates 110 stores in 24 states and British Columbia, Canada.

Market Definition

Like many merger challenges before it, this case will be won or lost on the relevant market definition. The companies describe themselves as “natural and organic foods retailers.” But the FTC might have a difficult time convincing a federal district court judge that the relevant market for evaluating the competitive effects of this transaction is limited to premium natural and organic supermarkets.

According to the FTC, premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects: (1) the breadth and quality of their perishables; (2) the wide array of natural and organic products and services and amenities they offer, and (3) the customer's shopping experience “where environment can matter as much as price.”

Challenges to Retail Food Mergers

While it has been a few years since the FTC challenged a merger in the food retail industry, the agency was faced with a series of such transactions earlier in the decade. Most of the transactions involved combinations of traditional supermarket chains. In those cases, the market was usually defined to include all supermarkets.

Those transactions might be more analogous to the recently proposed merger agreement between Pathmark Stores and A&P than to the Whole Foods/Wild Oats transaction. However, the FTC has broadened the market based on what outlets customers consider to be substitutes for purchasing grocery items.

In 2002, when the FTC challenged Wal-Mart's acquisition of the largest supermarket chain in Puerto Rico, Supermercados Amigo, Inc., the relevant market was defined to include supercenters—mass merchandise outlets containing full-service supermarkets—and warehouse club stores, such as Wal-Mart's Sam's Club.

The agency pointed out at the time, however, that “the determination that club stores are included in the relevant product market in this proceeding does not, of course, determine what the relevant product market will be in future supermarket investigations by the Commission.” Wal-Mart entered into a consent order agreeing to divest four Amigo supermarkets, in regions where Wal-Mart owned or planed to open at least one supercenter or club store.

By limiting the market to natural and organic supermarkets in its challenge to the Whole Foods/Wild Oats transaction, the FTC will have to show that consumers won't turn to supercenters, warehouse clubs, or even traditional supermarkets if the combined entity raises prices.

Reaction of Whole Foods

Whole Foods issued a statement on June 5, expressing its disappointment with the FTC's decision and its intention “to vigorously challenge the FTC in court.” The company questioned the agency's decision to limit the relevant antitrust product market to natural and organic food stores and to exclude other supermarkets.

“The Company believes that the FTC's position is without basis and contrary to its position in past merger reviews, where its definition of supermarkets has included conventional supermarkets as well as Whole Foods Market and Wild Oats,” said John Mackey, Chairman and Chief Executive Officer of Whole Foods Market.

Statement of Wild Oats

Wild Oats also issued a statement on June 5. “While we disagree with the FTC's position and believe it is without legal and factual merit, we are confident that, once presented with the facts, the Court will agree that this merger is pro-competitive and the FTC's application for an injunction will be denied, thus allowing us to proceed forward with the merger,” said Greg Mays, Chairman and CEO of Wild Oats Markets.

Mays added that Wild Oats intended “to cooperate with Whole Foods in all respects and to vigorously challenge the FTC in Court.”